Since mid-2012, the real estate market nationally and here in Sacramento has been marked by very low inventory of homes for sale. Statistics from local Boards of Realtors indicate that there has been only a three week supply of available homes for sale. These are being chased by a far larger pool of prospective buyers ranging from individual first time buyers seeking a loan up to huge money-backed investors paying cash for everything they can get. It’s a simple rule of economics that when the demand exceeds the supply, prices rise and that has certainly been the case in real estate. Last year, the price of residential homes in Sacramento skyrocketed up 18%. Many people, including a great many in the media, have applauded this as evidence of an economic recovery. But, if the increased prices are the result of a supply-demand imbalance, the question is what will happen to prices if balance is restored. We may soon find out.

Prior to 2012, the real estate market was very scattered. Prices were uncertain, jobs were still falling, and owners were struggling to get elusive loan modifications to keep their homes. Those that couldn’t – millions of them – were losing their homes either through short sales or, even worse, foreclosure. Two events in 2012 changed the market:

1. National Mortgage Settlement. In February 2012, California and most states reached a Settlement of the “Robo-signer Scandal” concerning lenders’ fraudulent foreclosure practices. This Settlement was called the “National Mortgage Settlement”. In that Settlement, the big banks – BofA, Wells Fargo, Chase, Citi, and GMAC/Ally – agreed to pay $27.5 Billion in reparations, primarily through principal reductions on owner-occupied home loans. This created two effects: 1) people who might have otherwise put their homes on the market for a short sale held off hoping that they might get some of the Settlement money; and 2) Lenders cut back on foreclosures fearing further legal actions against them. This shrunk the homes for sale market with reduced short sale and REO listings leading to today’s severe inventory shortage.

2. Home Owners Bill of Rights. In July 2012, California passed a series of laws which took effect January 1, 2013 and were collectively called the “Home Owners Bill of Rights” HBOR for short. The two major components of HBOR were: 1) a ban on “Dual Tracking” stopping the lender practice of foreclosing while loan modification was being negotiated; and 2) Borrower recourse against the lenders if they improperly handled the loan modification process. HBOR’s provisions very likely also apply to stop foreclosure while short sales and equity sales are progressing. The results of HBOR was very similar: Potential sellers held off while they attempted Modification under HBOR and lenders dropped foreclosures by 72%.

The result of this was today’s extremely low sale inventory and upward push on prices. But forces are underway that may bring change in the months to come.

A. Increase in Supply of Homes for Sale. Despite the hopes of the National Mortgage Settlement and the Home Owners Bill of Rights, most people are still not getting loan modifications. Recent statistics indicate that Lender willingness to modify loans is less than 25% . Further, increasing prices have made it more attractive for lenders to push short sales and foreclosures seeking a higher and faster recovery. In May, for the first time in over a year, foreclosure starts increased. Nationally, over 13 million properties are underwater and 1.7 million are in default or foreclosure. 700,000 more homes have already been foreclosed but are being held by lenders as REO’s. We expect that, due to likely changes on the buyer side (see below), we’ll see 1) more people give-up on loan mods and list their homes as short sales; 2) more lender foreclosures; and 3) lenders selling their REO inventory. In addition, rising prices have enabled many people to be able to sell their homes for above break-even. These “Conventional Sales” are up 64% from a year ago. Altogether, these will substantially increase the supply of homes for sale and decrease upward price pressure.

B. Decrease in Available Buyers. For every sale, there must be a seller and a buyer. We expect, as stated above, that there will be many more sellers. But will they find buyers… not all of them? Interest Rates are increasing. For several years, Buyers have enjoyed historically low interest rates. Recently however, interest rates have started to rise as the Feds start backing off their market support (“quantitative easing”). While they’re still low, every fractional increase knocks some buyers out of qualifying. Investor competition weakening. The big investors are finding it much harder to get good deals that make financial sense.

C. Effects of Sequestration. We’re not feeling it yet but most analysts expect the economy to start feeling the effects of the Sequestration program that took effect to push for a balancing of the Federal Budget. $87 Billion dollars is coming out of the economy this year through a reduction in Federal spending. Federal spending is scheduled to get slashed by another $110 Billion dollars each year for the next 9 years! While these cuts are arguably necessary for the economic salvation of our nation, they will no doubt result in job losses and possibly higher costs as these cuts are absorbed. That means more upside down owners putting their homes on the market as short sales and less available buyers with the resources or loan qualifying ability to buy those homes.

While none of us has a crystal ball to be able to say with absolute certainty that these effects will come to pass, the indicators are out there that changes are coming. Time will tell what that will mean for real estate owners, buyers, and the agents who serve them.

If you are struggling with real estate issues and don’t know where to turn, BPE Law Group, P.C. is here to help. Our Flat Fee Consultation Program can help you know your risks of deficiency judgment, tax bills, credit damage and job impacts. This will enable you to more effectively choose between seeking loan modification, short sale, or let the property go to foreclosure. To arrange a Consultation, call our office at (916) 966-2260 and our staff will schedule you with one of our very experienced attorneys. Consults can be done by phone. Have more questions? Check us out on our website at or e-mail me at